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Douch, M., Bouaddi, M. Revisiting Equity Premium Puzzles in a Data-Rich Environment. Applied Economics Quarterly, 65(4), 257-275.
Douch, Mohamed and Bouaddi, Mohammed "Revisiting Equity Premium Puzzles in a Data-Rich Environment" Applied Economics Quarterly 65.4, , 257-275.
Douch, Mohamed/Bouaddi, Mohammed: Revisiting Equity Premium Puzzles in a Data-Rich Environment, in: Applied Economics Quarterly, vol. 65, iss. 4, 257-275, [online]


Revisiting Equity Premium Puzzles in a Data-Rich Environment

Douch, Mohamed | Bouaddi, Mohammed

Applied Economics Quarterly, Vol. 65 (2019), Iss. 4 : pp. 257–275

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Author Details

Douch, Mohamed; Corresponding author. Department of Political Science & Economics, Royal Military College of Canada, P.O. Box 17000, Forces Stn, Kingston, On, Canada, K7K 7B4

Bouaddi, Mohammed; Department of Economics, School of Business, American University in Cairo, AUC Avenue, P.O. Box 74, New Cairo 11835, Egypt


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This paper modifies the conventional representative-agent consumption-based equilibrium models by making the habit-formation part depend on additional factors related to economic conditions. This paper assumes that innovations in the consumption surplus ratio are determined not only by consumption growth but also by other macroeconomic and financial factors. The resulting model allowed for a separation between the intertemporal elasticity of substitution and risk aversion. The model also generates highly volatile Intertemporal marginal rate of substitution which translates into fluctuating volatility capturing time varying economic uncertainty. The long-standing equity premium puzzle seems to have been resolved. The resulting pricing model accounts for a number of interesting properties, such as time-varying risk aversion, small relative risk aversion and an equity premium that is compatible with the observed equity premium. These results are obtained with admissible range of local relative risk aversion. In addition, the model generated small risk-free rate resolving the interest rate puzzle.

Table of Contents

Section Title Page Action Price
Mohamed Douch / Mohammed Bouaddi: Revisiting Equity Premium Puzzles in a Data-Rich Environment 1
Abstract 1
1. Introduction 1
2. Model Setting 4
2.1 Model Derivations 7
2.2 Specification of the Conditional Model 9
3. Empirical Results 1
4. Concluding Remarks 1
References 1
Appendix A: Latent Factors Estimation Procedure 1